AGR 513

AGRICULTURAL
MARKETING

CHAPTER 3
MARKETING THEORY
Chapter 3 Outline
3.1 Price theory
3.2 Market structure
3.3 Market power and bargaining power
3.4 Promotion
 PRICE POLICY
The DEMAND CURVE shows the relation
between price and quantity demanded holding
other things constant.
Other things include: the price of related goods,
consumer income, consumer preferences
Changes the other things affect the position of the
Dd curve. Price

Negatively slope

Dd

Quantity
 Continued..
The SUPPLY CURVE shows the relation
between price and quantity supplied holding other
things constant.
Other things include: technology, input cost
(fertilizer, seeds), government regulations.
Changes in these other things affect the position
of Ss curve. Price

Ss
Positively slope

Quantity
 Continued..
MARKET EQUILIBRIUM is at Eo
where quantity demanded equals to the
quantity supplied and at price Po and
Quantity Qo Price
Ss
Do

Po Eo

Quantity

Qo
 Continued..
Market Equilibrium & Disequilibrium
If the price below Po there would be excess Dd
◦ Consumers wish to purchase more than producers wish
to supply
If price above Po there would be excess Ss
◦ Producers wish to supply more than consumers wish to
purchase Price

S
D
Excess Ss

P1

Po E

P2

Excess Dd
D
S
Quantity
A shift in Demand
 When the price of good decrease, it will decreased the
demand of its substitute. E.g. if the price of coffee
decreased, the demand of tea will decreased.
 So, if the price of substitute good (coffee) decreased from
Po to P1, the demand curve (tea) shift from Do to D1.
 If the price stayed at Po there would be excess Ss at Qo, so
the market moves to a new equilibrium at E1 at Q1.
Price
Do

D1 S

Po Eo

P1 E1

Do

D1
S
Quantity

Q1 Qo
Factors contribute to change in Demand
 Continued..
A shift in Supply
Suppose safety & regulation are tightened
increasing producers costs, then the Ss curve shift
from So to S1.
If the price stayed at Po, there would be excess in
demand, so the market moves to a new
equilibrium at E2.
Price

S1
D

So
E2

P1

Po Eo

D
S1

So
Quantity

Q1 Qo
Factors contribute to change in
Supply
 Two Ways in which Dd may Increase

1) A movement along the demand curve from

A to B
 Represent consumer reaction to a price change
 This would follow a shift in supply
Price

A
Po

B
P1

Quantity

Qo Q1
 Continued..
2) A movement of the demand curve from Do to D1
 Leads to an increase in demand at each price
 E.g. at Po, qty demanded increase from Qo to Q2
 At P1, qty demanded increase from Q1 to Q3
Price

C
Po
A
F
B
P1

D1

Do
Quantity
Qo Q1 Q2 Q3
Supply / Demand PRICE QUANTITY MARKET CONDITONS

Demand > Supply Increased Decreased Black market, inflation,

rationing

Supply > Demand Decreased Increased Dumping , auction, cheap sale,

deflation

Demand = Supply Price equal To quantity Price determination /

( DD = SS ) Equilibrium
Government Stabilization Programme for
Pricing of Products
 Price Floor/Minimum price :
 The price imposed above the equilibrium & used to support farm
prices & income of farmers.
 Can cause significant resource allocation problems in the long run
because it can increase output in the long run.
 Can be seen as buyers market because the long effects of production
such as dumping, auction, cheap sale, and deflation.

 Price Ceiling/ Maximum price :

 Price below the equilibrium price.
 Sellers cannot set the price above the
equilibrium.
 It is the sellers market and in the long
run production may caused decrease in
output & lead to black market,
rationing, and inflation.
 E.g. : price for standard or premium
rice .
2. SUBSIDIES
 Is price guarantee to raise the farm prices and to protect the farmers income.
 Explanation: P5 = RM 6.00, Q = 5 units, P2= RM 5.00 , Q1 = 7 units
 No Subsidy – The price is at P5 and quantity is at Q, where A is the
equilibrium.
 Therefore total revenue is at P5 X Q
= RM 6.00 X 5 units
= RM 30.00
 With Subsidy – To encourage farmers to produce at Q1, the government will
guarantee them at price P5. But at P5 only Q is demanded so QxQ1 is the
amount bought by the government. Therefore AT QQ1 is the subsidy.
 Total revenue at P5 x Q1 = P5 X Q1
= RM 6.00 X 7 units
= RM 42.00
 Subsidy =(TR P5 x Q) – (TR P5 x Q)
= RM 42.00 – RM 30.00
= RM 12.00 OR
= P5 X (Q1 – Q)
= RM 6.00 X (7-5)
= RM 12.00
It measures the sensitivity of the quantities
demanded to the changes in the price
determination.
1) Elastic demand > 1
 When % change in Qty Dd > change in Price
 E.g. Qty Dd falls by 7% in response to a 5%
increase in price
 Elasticity is 7/5 = 1.4
 E.g. luxury products
2) Inelastic demand < 1
 Price elasticity is between -1 and 0
 When % change in Qty Dd < change in Price
 E.g. Qty Dd falls by 3.5% in response to a 5%
increase in price
 Elasticity is 3.5/5 = 0.7
 E.g. agricultural products
3) Unitary elastic demand = 1
 When price elasticity is exactly 1
 When % change in Qty Dd is = to
change in Price
 E.g. if Qty demanded falls by 5% in
response to a 5% increase in price Price

 Elasticity is 5/5 = 1 Dd
P0

4) Perfectly elastic demand : zero

 Price remain unchanged but changed Q0 Q1
Qty

in Qty
5) Perfectly inelastic demand : infinity Price
Dd

 Qty remain unchanged but changed in

P1
Price
P0

Qty
Q0
Price elasticity for a linear demand curve

The price elasticity varies along the length

of a straight line demand curve.
Price

Elastic > 1

Unit elastic =1

Inelastic < 1

D
Qty
Factors Influencing The Price Elasticities
Cross Price Elasticity of Demand
The cross price elasticity of demand for good with
respect to the price of good is:
Cross Price Elasticity, EDd
= % change in Qty Dd of good A
% change in Price of good B

E Dd = Negative (-) E Dd = Positive (+)

EDd = negative (- 0.87) EDd = positive (+ 0.78)
Products :Complementary Products : Substitute products.
products. Example. Coffee and Milo
Example : Tyres and car
 Income Elasticity of Demand
 Measures the sensitivity of quantity demanded to change in income.
Income Elasticity, Edd = % change in Qty Dd of good
% change in consumer income

 E.g. if increase 10% in income & demand for a good increased by

20%, the income elasticity of demand would be 20%/10% = 2

1. Negative income Edd; increase in income will reduce in demand

and may lead to changes to more luxurious substitutes.
2. Positive income Edd; an increase in income will increase in
demand.
3. A zero income elasticity (or inelastic) demand occurs when an
increase in income is not associated with a change in the demand
of a good.
 ELASTICITY CLASSIFIED GOODS

Edd = < 1 but > 0 Products: Necessity/normal goods.

= Positive (+ 0.85) E.g.: cooking oil, dairy products,
vegetables
Edd = >1
= Positive (+1.25) Products: Luxury goods.
E.g.: wine, high quality chocolate

Edd = Negative ( - 0.96) Products : Inferior goods.

E.g. : frozen dinners, canned goods,
instant noodles
Edd = (0) Zero Products : Must or necessities goods
Example : Salt, sugar
 Elasticity is Higher in the Long-
run
Demand tends to be more elastic in the long
run but relatively inelastic in the short run.
Consumer demand curve become more
elastic over time as consumer adjust to
changing price.
Factors That Influence The Price
Determination
Continued..
Approaches Used For Price Determination Of
Product

To enhance sales
iii. Mark-up
 Is an addition to the total cost for production based on % of the
selling price. The additional cost or mark-up cost is added to
avoid losses such as overhead and profit accumulation of the
marketing channel.
 The mark-up cost is in the form of Ringgit Malaysia or
percentages.
 Example:
◦ Production cost for Tembikai Juice Juicy is RM 2.00 and 50 % is added
on the production cost. How much will be the new production cost ?
◦ Before you answer the question, you have to look the aspects of
marketing channel.
◦ Processor - is one who process the agricultural goods from raw to
finished or unfinished.
◦ Middlemen - is an organization or individuals who specialises certain
marketing channels such as storing, financing or transportation.
◦ Retailer - a marketing middlemen that sells to consumer.
 Sellingprice of Processor :
 SP of Processor
= Cost of production per unit X (100% + % mark up)

 Sellingprice of Middlemen:
 SP of Middlemen = SP Processor / (100 % - % mark-
up)
OR
 SP of Middlemen = SP Processor + RM mark-up

 Selling price of Retailer:

 SP of retailer = SP Middlemen / (100% - % mark-up)
OR
 SP of Retailer = SP Middlemen+ RM mark-up
 Example
The production cost of Tembikai Juice-Juicy is:
 The cost at producer level is RM 2.00, processor forecast an
increased of 80%, middlemen sees 20% markup and retailer optimist
RM 3.00. What will be the selling price of Tembikai Juice-Juicy at
the processor, middlemen and retailer.
 SP of Processor = (RM 2.00 X 100%+80 %)
= RM 3.60
 SP of Middlemen: (20% markup)
= RM 3.60/(100% - 20%)
= RM 4.50
 SP of Retailer: (mark-up is RM 3.00)
= (RM 4.50 + RM 3.00)
= RM 7.50
 Continued..
Analysis of Profit Margin for :

 Processor: RM (3.60 – 2.00 = 1.60)

 Middlemen: RM (4.50 – 3.60 = 0.90)
 Retailer: RM (7.50 – 4.50 = 3.00)
 The differences of profit margin differs from one level to another
level of the marketing channels.

 Processor – has to sell the product to the middlemen because it

produces at large quantities of food. The availability of storage
facilities will reduced the burden of storing the finished product.

 Middlemen – will store the products that has been collected from
the processor. Short period of time for storage is necessary and later
will be sent to the retailer for further storage.

 Retailer – profit margin is higher as compared to the producer, the

middlemen and the processor because of high risk accumulated in
holding the product especially the storage problems.
 Example 2 :
Mark-up ( % or RM)
Marketing Price level Mark-up Profit Margin Sales Net Profit
channel (RM) Volumes

Processor 1.00 + 0.50 = RM 0.50 (1.50-1.00) 100 units RM50.00

1.50 = 50 cents

Middlemen 1.50 + 0.30 = RM 0.30 (1.80-1.50) 80 units RM24.00

180 = 30 cents

Retailer 1.80 + 0.45= RM 0.45 (2.25-1.80) 70 units RM31.50

2.25 = 0.45 cents
 COMPETITION (Pricing Strategies)
Below Market Price:
1) Price penetration
◦ Penetration pricing involves the setting of lower,
rather than higher prices in order to achieve a
large market share.
◦ This strategy is most often used businesses
wishing to enter a new market.
◦ Many consumers willing to purchase products if
the price is low.
◦ A successful penetration pricing strategy may
lead to large sales volumes/market shares and
therefore lower costs per unit.
 Continued..
2) Price Blockage or barrier
◦ A pricing strategy in which identical products are packaged
together in order to enhance profits by forcing customers to
make an all-or-none decision to purchase.
◦ To stop the competitors from competing the market.
◦ Willing to tag the price below the production cost.
◦ The firm’s has a strong financial status
◦ Is not willing to share technologies if the technologies
are cheap and accessible.
◦ High risk if there is other competitors overhead cost is low.
◦ E.g. A package of toilet paper. Oftentimes the supermarkets will bundle
the toilet paper into units 10 – 20 rolls to force the consumer to buy the
large pack or not to buy the pack at all. By packaging the toilet paper in
this way, the supermarket can earn a larger profit. E.g. Cans of soda in 6
or 8 packs.
 Above market price :
1) Skimming strategy
 Price skimming is when a marketer sets a relatively
high price for a product or service at first, then lowers the
price over time.
 As the demand of the first customers is satisfied, then the
firm lowers the price to attract another, more price-
sensitive segment.
 Price skimming occurs in mostly technological markets as
firms set a high price during the first stage of the product
life cycle. The top segment of the market which are willing
to pay the highest price are skimmed of first. When the
product enters maturity the price is lowered.
 Example in high-end electronics. For instance, the Sony
PlayStation 3.
 The skim price (P1) generates initial sales of Q1, and
revenues P1 times Q1 (the sum of squares A and B).
 When the price is subsequently reduced to P2,
additional sales are generated equal to Q2 minus Q1.
 The second round revenues are showed by box C.  
 So, total revenue under the skim strategy is the sum of
the boxes A + B + C.
 Continued..
2) Premium Strategy
 A premium pricing strategy involves setting the
price of a product higher than similar products. It is
used to maximize profit in areas where customers
are happy to pay more & where there are no
substitutes for the product.
 Unique products usually have the best chance of
commanding premium prices. This is one reason
why pharmaceuticals–where the product is
protected by patent–tend to be very expensive. E.g.
Gamogen
 Weakness on Price Determination:
1) Difficulties in Forecasting
◦ New product in the market
◦ Acceptance of products to the consumer
2) Price determination in the market
◦ The producer will determined the price
◦ Types of promotional approaches for price
determination
3) Competition
◦ Types of competition in the market will reflect the
price of the products. Such competition are :
1. Perfect competition
2. Monopoly
3. Oligopoly
4. Imperfect competition
 Continued..
4) Government Policy
 Few areas has been explored for the benefits of the
manufacturer and the consumer such as by placing
the date of manufactured goods, halal, price,
ingredients and geographical concern of the
targeted consumer. Therefore, the cost will
increase.
 Example of NGO is FOMCA (Federation of
Malaysian Consumers Associations) deals with the
consumers affairs of products such:
◦ Ingredient content
◦ Date of manufactured and expiry date
◦ Halal
◦ Ethics groups
◦ Price etc.
 Continued..
5) Price determination by producer
 Demand - price and non-price (i.e. after sales service).
 Competition – above and below equilibrium price.
 Acceptance of the product by consumer

6) Price flexibility in the market

 The producer will determined the price (i.e.
recommended selling price).
 The producer will fixed the price of the product and
besides that promotion has to accommodate the new
product in the market.
 Taste and preference of the consumer has to be taken
into consideration.
THE REALITY IN MARKET
STRUCTURE
Price forces
Price forces Definitions
Price taker An individual or company which is not influential enough to
effect the price of an item. Example an individual consumer is
also considered as to be a price taker, because the purchases of
one consumer do not affect the price of company sets for its
products.
Price discrimination A pricing strategy that charges customers different prices for the
same products or services.
Cartel A cartel is a formal agreement among competing firms that
usually involve homogenous products. Cartel members may
agree on such matters as price fixing, total industry output,
market shares, allocation of customers, allocation of territories,
establishment of common sales agencies, and the division of
profits or combination of these. The aims is to increase an
individual members’ profits by reducing competition.
Price leadership Price leadership is a procedure by which all competitors in the
industry will follow the pricing practices of one or more
dominant firms.
4 Types of Market Structure

1) Pure / perfect competition

2) Monopoly
3) Monopolistic competition
4) Oligopoly
MARKET POWER
3 Forms of Market Power
 Types of Bargaining Power
 Bargaining power refers to the relative strength of buyers and
sellers in influencing the term of exchange in a transaction.
 Opponent Pain
 The influence of either buyer or seller in a negotiation gained
through the ability to threaten or coerce the opponent in the
process of bargaining. E.g. During the festive seasons, some of
the basics food items has increase in price and if the buyer tends
to purchase the products, sometimes the influence of the
opponent-pain will occur. (1 win, 1 lose)

 Opponent Gain
 The influence of either buyer or seller in a negotiation gained
through cooperation and understanding while in the process of
bargaining. ( win-win situation)
8- Sources of MARKET BUYER
Continued..
Continued..
Continued..
PROMOTION
Purpose of Promotion
 PRODUCT LIFE CYCLE
Intro Growth Maturity Decline  2. GROWTH STAGE
 Objective is to build sales.
Sales volume (RM)

 E.g. Couponing helps develop

purchasing habits in customer.
Convert Minimal brand
> ppl to support
buy  3. MATURITY STAGE
 Objective is to persuade
Edu. abt
the product
Maintenance of
brand share
Time
consumers to continue buying a
position product they already know about
 E.g. irregular couponing with
 1. INTRODUCTION STAGE
moderate schedule of mass media.
 Objective is to inform the
customers.  4. DECLINE STAGE
 Combination of personal sales and
 Only minimal brand support is
mass media sales.
 E.g. in store demonstration and tv. offered in the promotion
campaign to remind the customer.
 STRATEGIES AT DIFFERENT
PLC

INTRO GROWTH MATURITY DECLINE

Market Increase Defend market Maintain

development. market share. share. efficiency in
e.g. tv, radio, exploiting
demo product.
Factors that Attribute to the Promotional
Approaches
Continued..
 Two Types Of Policy

Push – Policy
Where producer promotes its products
through various marketing agencies.

Pull – Policy
Where producer promotes its products
directly to the final consumer.
 PROMOTION

PERSONAL MASS SALES

SELLING MARKETIN INCENTIVE
G S

ADVERTISIN PUBLICITY
G
PERSONAL SELLING
Also known as direct selling.
Communication between individuals to
persuade and to inform the targeted
customers.
Accomplished through sales people.
Usually product is expensive, very technical,
difficult to get and needs services-after-sales.
MASS MARKETING/SELLING
Consists of advertising and publicity
Mass selling is less flexible than personal selling
There are 2 types of advertising
1. Informative advertising- giving out various
information about new products, it’s uses, new
ingredients, new formula, target market etc.
2. Persuasive advertising - types of advertisement
which try to persuade & to influence target
consumers to buy a particular brand name products
and commonly seen on TV e.g. KFC
Examples of advertising are:
 ADVERTISING

PRINT AUDIOVISUA OTHERS

MEDIA L MEDIA

Newspaper, TV, radios, Bill boards,

magazines, movies posters,
catalogs, skywritting,
direct mails ballons
 PUBLICITY
Any information about an individual (producer) , a
product, or and an organization that is distributed
to the public through the media such as radio or
newspaper, that is not paid for or controlled by the
sponsor.
Example, if you drink Tongkat Ali and
Mengkudu, you will be vitalized and strong. You
will tell the importance of Tongkat Ali to others.
SALES INCENTIVES
Is a programme categorized as sales
enhancements and can be defined as marketing
activities that stimulate consumer purchasing
and dealer effectiveness.
Examples of sales incentives:
a) Retail outlet
b) At exhibition and conventions
a) Retail outlet
Special in store display
Product demonstration
Product sampling
Point of sale signs
Sales contest
Information and recipe book
b) At exhibitions and conventions
Special display
Educational representatives
Contest and prices
Product demonstration
Information and recipe book